Modern Industrial Organization 4th Edition Dennis W. Carlton, Jeffrey M. Perloff - Solutions

Why do so many industries have protections from entry if such protections harm consumers?
States may ‘regulate’ firms within their state. By doing so, they can enable firms in their state to form a cartel that sells to consumers in the other states.What is the consequence if states do that?
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Where demand curves are compensated (adjusted for income effects), it can be shown thatwhere Q is the quantity demanded, p is the price, and subscripts indicate the products i or j. Suppose but . What are the relative sizes of the two relevant cross-elasticities of demand?Why does it matter which
Suppose there are some industries in which the competitive equilibrium does not exist (the core does not exist—see www.aw-bc.com/carlton_ perloff “Theory of the Core”). Should firms in these industries be allowed to collude under the antitrust laws?
Some foreign antitrust authorities can impose penalties, if they determine that prices are excessive.What effects do these laws have?
A product has a world market. The firms engage in a price-fixing conspiracy. Under U.S. antitrust laws, consumers of the product can be compensated for their U.S. purchases. Suppose most consumers live in other countries without antitrust laws. What does this imply about the optimal penalty?
The foreign supply curve is The demand curve is What is the competitive equilibrium?If Country 1 levies an import tariff, t, of what are the new equilibrium price, quantity, and tax revenues? What is the equilibrium if Country 1 acts like a monopsony? What is the welfare-maximizing tariff for
Suppose that all the buyers for a particular product live in Country 1, and all the firms that manufacture that product are in Country
A competitive industry with an upward-sloping supply curve sells of its product in its home country and in a foreign country, so that the total quantity that it sells is No one else produces this product. There is no cost of shipping. Using graphs, show the prices and quantities in the two
Both goods are sold only to consumers in other countries.The demand curves for the two goods areCalculate the Bertrand equilibrium assuming that marginal cost is zero. Now suppose that Country 1 and Country 2 each place a export tax on their domestic firms. What are the new equilibrium prices and
Suppose Firm 1 in Country 1 produces Good 1 and Firm 2 in Country 2 produces Good
Given that the world supply curve is horizontal at the world price for a given good, can a subsidy on imports raise welfare in the importing country?Explain your answer.
Show that if the importing country faces an upward-sloping foreign supply curve, a tariff may raise welfare in the importing country.
Suppose two customers pay different prices for the identical physical product. Give a sufficient condition such that it is reasonable for an analyst to conclude that there is no price discrimination.
Is the establishment of an organized auction market more likely to benefit small firms or large firms?
Suppose that a firm has an upward-sloping marginal cost curve. Illustrate how the price-marginal cost margin behaves as price increases. How does the price-average cost margin change as price increases?
Due to the recent financial crisis, banks sold certain financial derivatives that caused liquidity problems as they were difficult to sell. One proposal to increase liquidity is to standardize such products and trade them on organized exchanges.What reaction might banks have to this proposal?
Rigid prices can create inefficiency. Do minimum wage laws impose such inefficiency?
Using an argument similar to that for monopolistic competition, show that firms operate on the downward-sloping section of their average cost curves for inventive activities.
If the government could only observe prices, quantities, and royalty rates (but did not know the demand curves or the marginal cost curves), could it determine if a royalty was for a minor or major patent?
Graphically illustrate (using the benefit and cost curves in Figure 16.1) the effect of a longer patent life on the incentive to invent.
If a court determines that one firm has violated another firm’s patent, the court can order the infringer to stop doing so immediately. Do you think the court should alternatively tell the infringer that it has to stop after some time period?
Suppose a firm has a patent but it is worried that the patent might not be upheld in a court as being valid because it is not sufficiently novel to deserve patent protection. After an entrant infringes the patent, it sues to have the patent declared invalid.The original firm offers to ‘settle’
Why does an artist destroy a lithograph plate after making a fixed number of copies?
Suppose the cost of producing a machine that lasts N periods is If the interest rate is 5 percent, what duration should the firm plan for its machine? Describe the conditions determining whether it should modify its behavior if consumers can maintain the machine for one extra period for Does your
Explain how the analysis in Problem 1 is affected if four-wheel-drive tractors are close substitutes for other types of tractors.
Explain how the analysis in Problem 1 is affected if an investment tax credit (which lowers a firm’s taxes in proportion to the amount spent on new capital) encourages overconsumption of tractors.
Explain how the analysis in Problem 1 is affected if farmers never sell or buy used tractors (that is, transaction costs are too high for a used tractor market to develop).
Suppose that firms improve products over time. If there is a switching cost to changing products, explain how that can affect pricing.
A textbook author does nothing to change a book’s content, but reorders the problems at the back of each chapter. What effect, if any, will this have on book sales?
Using the model in Appendix 14A, suppose the inverse demand curve facing a monopoly is where is the amount of advertising, and the cost function is mQ. Determine the optimal level of advertising and output.
A manufacturer uses vertical restraints in its contract with its dealer network (see Chapter 12) to encourage dealers to advertise locally. Under what conditions are such vertical restraints socially desirable?
What happens if a firm advertises, but only some people see the ads? Hint: Consider the touristsand-natives model in Chapter 13.
What is the profit-maximizing rule for advertising if advertising depreciates (that is, consumers forget about it over time if not reminded)?
Using a graph similar to Figure 14.1, explain why a firm might not want to spend on advertising, even though doing so shifts the firm’s demand curve to the right. (Hint: Discuss what happens to the elasticity of demand or the price at the monopoly optimum.)
A firm spends a large amount on advertising that informs consumers of the brand name of its bananas.Should consumers conclude that its bananas are likely to be of higher quality than unbranded bananas? Why or why not?
Determine the equilibrium prices, quantities, and number of high- and low-price stores in the tourists-and-natives model if consumers have downward-sloping, linear demand curves:where a and b are positive constants.
Suppose that two economists write a textbook.Their publisher offers them royalties on sales of the book equal to a percent of the sales revenue. The economists are concerned. They believe that such a royalty system causes the publisher to sell less than the joint profit-maximizing number of copies
Some cities grade restaurants on cleanliness, giving them a grade of A, B, or C. The grades are posted in the front window of the restaurant. How do you think this system would compare to a numerical grading system where the grades are on a scale of 1 to 100?
Many online retail stores provide information on product pricing to consumers who visit their website.However, some provide shipping information only after a customer enters his order. The customer can choose to void the order if he thinks the shipping charges are excessive. Explain how this way of
One possible measure of the degree of vertical integration is the ratio of value added (sales minus material and energy costs) to sales. Contrast this measure for a mining firm and for a car producer.
A woman wants to present a friend with a gift and, as an inside joke, wants to present it inside an empty red-and-white-striped barrel of Kentucky Fried Chicken. She tries to buy the empty carton from a fast food chain that sells Kentucky Fried Chicken and is told that it costs $10! The barrel full
A monopolistic producer uses a dealer network, in which it limits the number of dealers and restricts them to exclusive territories, to sell its product in another country. Some importers buy the product in the other country and sell it in the United States. Such imported products are said to be
If a pure profits tax (a percentage of the economic profits) is collected at the retail level, does a downstream monopoly’s incentive to vertically integrate change? Does the incentive change if the tax is collected at both upstream and downstream levels?Does a sales tax (at the retail level)
If a state passes a law protecting independent franchisees from having their franchises terminated, what is the likely effect of that legislation?
A manufacturing firm merges with another firm to vertically integrate forward into the production of selling of products so as to engage in price discrimination.Will such a vertical merger help some groups of consumers at the expense of others?
Suppose that the Japanese firms in Example 11.1 were indeed predating for 20 years in the hope that in the 21st year and thereafter they could charge a monopoly price. Suppose that the annual loss is $1 million for each of the first 20 years, and let be the annual flow of monopoly profits
Using a model of price predation, explain why driving a rival into bankruptcy does not, by itself, enable the predator to charge monopoly prices.[Hint: What happens to the assets of the bankrupt firm?]
If a firm has debt, it must pay interest to the debtholders. Suppose that there is a blot on a manager’s record if the firm he or she operates goes bankrupt. Discuss whether the use of a high ratio of debt to equity among all firms in a market could be a practice that facilitates collusion.
Describe how a joint venture for research and development can reduce competition.
Suppose that two rival manufacturers sell to the same retail stores. If one manufacturer imposes the condition that the retail stores carrying its product must charge the same retail price for its product as it charges for its rival’s product, what happens to the prices of these manufacturers?
In Figure 10.5, if your costs of production are $1 each for halibut and pie, which pricing scheme—individual pricing, pure bundling, or mixed bundling—maximizes your profit?
A monopoly produces and delivers goods to consumers who are located at varying distances from the factory. It costs m per unit to produce the good and $1 per mile to transport a unit of the good.Resales are impossible. Calculate the price that a monopoly charges consumers at location t if demand is
Let the demand for Products 1 and 2 be and , where qi is the quantity of Good i and pi is the price of Good i. Assume production costs are zero.Calculate the prices that two separate monopolies would charge when each regards the other’s price as beyond its control. Calculate the prices that a
Suppose a manufacturer sells a button-fastening machine that saves a firm the labor cost of per button sewn on shirts. Suppose firms differ in the total number of buttons they sew on. The manufacturer sells its machine with a requirements tie-in that requires a purchaser to buy all its buttons from
A person who consumes X units of Good 1 and Y units of Good 2 derives utility of Suppose the person has $100, the price of Y is $1, and the nonlinear expenditure for purchasing X units of Good 1 is What X maximizes that person’s utility?
In an English auction with only two bidders, can you describe a situation where a reserve price is desirable?
If a firm faces identical consumers and uses a twopart tariff, will its marginal price be above its marginal cost? If not, how does it make a profit?
Would a price-discriminating monopoly ever produce less than a nondiscriminating monopoly?
Suppose a consumer wants just one unit of a good and is willing to pay at most $10. Draw the demand curve and calculate the maximum consumer surplus that can be extracted. Suppose that there is a second consumer who also demands just one unit and is willing to pay at most $9. A perfectly
Suppose there are two groups of consumers and that it is optimal for a nondiscriminating monopoly to set p $10. At that price, no one from the first group chooses to purchase. Now, suppose the monopoly can price discriminate. Will total output expand? Why or why not?
Many retail stores provide discounts for regular customers, if those customers sign up for a rewards card. Why do such stores not worry that regular customers will resell these goods?
A (natural) monopoly has a flat marginal cost curve. Its average cost curve is downward sloping(because it has a fixed cost). The firm can price discriminate perfectly.a. In a graph, show how much the monopoly produces, Q*. Will it produce to where price equals its marginal cost?b. Show graphically
Disneyland Paris price discriminates by charging lower entry fees for children than adults. Why does it not have a resale problem?
Suppose that the demand function is Q s /p, where Q is the total quantity demanded, s is a measure of the size of the market, and p is the price of the homogeneous good. Let F be a firm’s fixed cost and m be its constant marginal cost. If n firms compete in a Cournot model, calculate the price,
Distinguish between zero profits and a price-cost margin that equals zero.
(Difficult) Evaluate the following argument: “There exist demand curves for which a monopoly would pass along cost increases in price on a one-for-one basis. Therefore, nothing can be inferred about the competitiveness of an industry by comparing price changes to cost changes.” In your
Concentration ratios are typically a firm’s share of domestic production. If the United States engages in more international trade, will such concentration measures lose meaning? Could this effect explain the vanishing of the price-concentration effect over time?
The supply of medical doctors cannot be expanded quickly because it takes years to train them. If a hospital wishes to enter a new market, does it face a barrier to entry?
An investor decides to purchase a business. He hires a consultant to help him find a good one.The consultant advises to find a business that faces no competition because such a business can earn rates of return in excess of those businesses that do face competition. Is this good advice?
Show graphically that if a firm’s MC AC a constant, it will produce a product if it is socially desirable for that product to be produced.
What is the effect of a cost-saving technological change on a monopolistic competition industry in which the cost curves facing each firm are C(q) mq F, where m is the constant marginal cost, and F is the fixed cost? Hint: A cost-saving technological change may be modeled as reducing m, reducing
In Hotelling’s town, if all firms are required to charge the same fixed price, describe the equilibrium location of three firms. Explain your answer.Now describe the equilibrium for four firms.
Explain and illustrate the following claim: “In our example, a monopolistic competition industry with homogeneous products cannot be more than one firm away from the output sold at price equals marginal cost.”
In the Salop circle model, if all consumers get more pleasure from ice cream (u increases), how does the equilibrium change?
Explain how, in a monopolistically competitive industry, high fixed costs can result in too little variety.
Using the data in Example 6.6, calculate the market demand elasticity for automobiles in the mid-1950s. For large changes in price and quantity, an arc elasticity is used. One common method of calculating an arc elasticity is to use the midway point between the two price-quantity pairs: (p, q)
What is the relationship between the Stackelberg model and the dominant-firm-competitive-fringe model (Chapter 4)?
For n 2, 5, 10, 50, and 1,000, add columns to Table 6.2 fora. Market elasticity, , which equals (dQ/dp)(p/Q).b. Lerner’s measure of market power, (p MC)/p.c. Consumer surplus.d. Social welfare consumer surplus industry profits.e. Deadweight loss (the amount by which social welfare is
What happens to price and output in the Cournot, Bertrand, and Stackelberg models if marginal costs increase by 10 percent?
What are the best strategies for Players 1 and 2 if each chooses between setting a low price or a high price and the payoffs are 5 if both firms charge the high price and zero for all other combinations of strategies? [Hint: Write down the 2 2 normalform representation of this game and look for
Show the payoff matrix and explain the reasoning in the prisoners’ dilemma example where Jeff and Dennis, possible criminals, will get one year in prison if neither talks. If one talks, one goes free and the other gets five years; and if both talk, both get two years. (Note: The payoffs are
How does the Cournot equilibrium change if each firm faces a fixed cost of F as well as a constant marginal cost per unit?
(Problem based on Appendix 5A.) Show that a cartel’s price falls as the number of noncartel firms ( j )increases.
(Problem based on Appendix 5A.) Show that the sum of a cartel’s output plus the output of noncartel firms is less than the competitive output and that the corresponding price is higher than the competitive price.
Use a graph to show why an increase in the market demand elasticity reduces a cartel’s monopoly power. Show how an increase in the market demand elasticity affects the elasticity of the residual demand curve.
Historically, at each Organization of Petroleum Exporting Countries (OPEC) meeting, Saudi Arabia (the largest oil producer) argued that the cartel should cut production. The Saudis complained that most OPEC member countries, including Saudi Arabia, produced more oil than their cartel agreement
What effect does a binding minimum wage have on a monopsony labor market?
Would a profit-maximizing dominant firm ever produce more than if it were a monopoly? Hint:Show the behavior of both a monopoly and a dominant firm (in the no-entry model) on the same graph and note where the marginal revenue curves cross.
How would the no-entry model diagrams (Figure 4.6) change if fringe firms had the usual U-shaped average and marginal cost curves? Assume that because of a barrier to entry, there are only n fringe firms. Describe the types of possible equilibria.
By showing the behavior of both a monopoly and a dominant firm in the same graph, show that monopoly profits are greater than the profit of a dominant firm in the no-entry equilibrium (MCd).Show how much consumers benefit from buying from a dominant firm-competitive fringe rather than from a
Suppose the Environmental Protection Agency sets new requirements that raise the (fixed) costs of reporting compliance with pollution control rules(Pashigian 1984). How would this change affect(a) the market price, (b) the number of fringe firms, (c) total output, and (d) the dominant firm’s
Suppose the demand curve for corn is Q(p) 10 p. Suppose that one firm owns all five units of corn in the world and has zero marginal cost.Does a monopoly sell less output than would be sold in a competitive market in which 100 firms each own 0.05 units?
If the demand curve is Q(p) p, what is the elasticity of demand? If marginal cost is $1 and 2, what is the profit-maximizing price?
If the demand curve is Q(p) 5/p, what is the elasticity of demand? What is total revenue when p $1 and when p $30? If production costs $1 per unit, and the smallest production level is 1 unit, how much should the monopoly produce?
After a shift in the demand curve, show that a monopoly’s price may remain constant but its output may rise.
Does a monopoly’s profit differ if it chooses price or quantity (assuming it chooses them optimally)?Why can’t a monopoly choose both price and quantity?
The U.K. produces and imports eggs. Suppose that the government imposed a quota on imports:Foreign suppliers could export no more than Q eggs (regardless of price). What effect does this quota have on the foreign supply curve of eggs, the total U.K. supply curve of eggs, the equilibrium price,
When is a firm’s shutdown point equal to the minimum point on its average cost curve?

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Modern Industrial Organization 4th Edition Dennis W. Carlton, Jeffrey M. Perloff - Solutions

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